Five Portland-area businessmen support bailout

The proposed $700 billion bailout of the nation's struggling financial system is infuriating, unfathomably expensive and, in the opinion of five Portland-area business leaders, absolutely necessary.

Though aspects of the bailout bill are now facing tough questions in Congress and the press, these Portland-area executives are convinced that the alternative to radical government intervention is simply too dangerous.

"This is not about trying to save individual companies, it's trying to save the economy," said Irving Levin, chair of Genesis Financial Solutions in Beaverton. "They're trying to make sure there is not a complete meltdown."

Gerry Langeler, a Lake Oswego venture capitalist, put the crisis in similarly stark terms. "This is like calling out the National Guard for the financial markets," he said. "They couldn't tiptoe into this. I think (Treasury Secretary Henry) Paulson was right. We were at a tipping point."

Paulson and Federal Reserve Chairman Ben Bernanke first proposed the bailout plan Friday, arguing that the nation's financial system was on the brink of a cataclysmic collapse. The plan calls for the Treasury to buy from financial firms as much as $700 billion of the troubled mortgages, mortgage-backed securities and other financial assets that have killed Wall Street titans and brought the nation's economy to the edge of an abyss.

The plan, still lacking in details, came under broad attack Tuesday from academics, economists and politicians from both the political right and left. Among other things, critics said it vests too much authority in the Treasury Department, which has claimed repeatedly and wrongly in recent months that the problems on Wall Street were "contained."

But the five local executives interviewed by The Oregonian voiced their support. When news leaked last Wednesday that three large money market funds -- considered to be among the safest of investments -- had suffered losses large enough that individual investors likely wouldn't be able to get all their money out, it provided a frightening glimpse of how the financial contagion could spread.

"The financial markets of the world are built on assets and trust," Langeler said. "Institutions have to have the assets and people have to trust that they do. The minute that trust is broken, you have a very perilous situation."

All of those interviewed for this story are successful entrepreneurs and executives who, it could be argued, have much to gain by a bailout that stabilizes the nation's financial system and protects the status quo. But they argue that no one will benefit if the economy slides into a deep decline.

Not that the bailout will fix all that ails the U.S. economy. Far from it. The executives predicted a protracted period of uncertainty, higher inflation, and continued tight credit that will likely lead to further job losses and company failures.

"Even with a trillion-dollar bailout, I'm not sure that this covers all bets," said Jon Von Schlegell, of Endeavour Capital in Portland. "We still have pain and a great sorting of problems ahead of us. It's not like we write a $700 billion check and everything's normal."

Levin, who made his fortune in the credit card business, spoke in particularly bleak terms. He has been predicting a "massive de-leveraging" of American society for some time as individuals and corporations alike try to get out of debt.

The days of financial firms and hedge funds leveraging themselves to the hilt to maximize profits are over, he predicted, as is the era of consumers living beyond their means with the help of credit cards, home equity lines of credit and other kinds of debt.

"Consumer spending will be cut way back," Levin predicted. "That's not all bad. But it will hurt the economy. It will lead to loss of jobs."

Executive compensation
It's not clear at this point who will be eligible to sell troubled assets to the government. Bob Sznewajs, CEO of West Coast Bank in Lake Oswego, said he doubts that community banks like his will be able to sell nonperforming loans to the Treasury.

"The benefit of solving this crisis will come to the community banks as the credit markets return to normal and the capital markets return to normal," Sznewajs said.

The local executives sounded downright populist at times on the topic of compensation for Wall Street executives.

Most echoed Democratic Party calls that federal aid should be contingent on companies putting limits on executive compensation and golden parachutes. The Treasury has resisted such a condition arguing that it will persuade some holders of so-called "toxic debt" to not participate in the program.

"Whatever form the bailout takes, I do hope they tie it to companies that allow these huge bonuses to people who were on watch when these things happened," Von Schlegell said. "To walk out of Merrill (Lynch) or Lehman with a $20 million bonus when the company implodes, that's not acceptable."

Merrill Lynch sold itself under duress last week to Bank of America. Lehman Brothers went bankrupt the same day.

Proponent of "clawbacks"
David Nierenberg, a Camas, Wash., investor, went further, calling for "clawbacks" that would allow the government to recover compensation paid to former executives and directors who were in charge when companies moved into subprime mortgages and other high-risk securities that put them in harm's way.

Nierenberg also urged the government to take equity positions in the companies receiving federal aid, as it did when it bailed out Chrysler in 1979. The government ended up making money on its investment in Chrysler.

"If the government is going to put all this money of ours at risk, it should get equity, warrants and options to get repaid first," he said.

One of the most pervasive arguments against a bailout is that of moral hazard, the chance of protecting business players from the downside of their reckless behavior. Critics argue that a bailout would remove the consequences for reckless behavior that are essential to the proper functioning of a market.

The local executives pointed out that government's actions to date have already caused considerable pain.

Shareholders of defunct investment banks Bear Stearns and Lehman Brothers lost most or all of their investments. Investors in insurance giant AIG lost about 80 percent of their position when the government took control of the company.

Nierenberg argued that a bailout makes sense if it can limit the pain. "Right now," he said, "there are ordinary people who are being harmed along with people who made wildly improvident decisions, and that's harsh justice."